The Internal Revenue Service wants to develop regulations explaining how employers and retirement plan advisors should implement new defined contribution plan investment diversification rules.
Members of Congress added the rules, given in Section 401(a)(35) of the Internal Revenue Code, when they adopted the Pension Protection Act of 2006.
The section encourages employees of publicly traded companies to diversify holdings of employer stock.
The proposed regulations are based on IRS Notice 2006-107, a batch of guidance issued in December 2006 that gives the IRS interpretation of Section 401(a)(35).
The draft regulations deal with topics such as the definition of “publicly traded employer security” and the types of restrictions and conditions that plans can impose on the sale and purchase of publicly traded employer securities
The Internal Revenue Code section requires a plan to give plan participants who buy publicly traded employer stock with their own money to sell the stock and reinvest the proceeds in other plan investments.
If employers give participants employer stock, participants who have at least 3 years of service must have divestment rights.
The law exempts one-person retirement plans and stand-alone employee stock ownership plans from the diversification requirements.
The law also exempts employers with stock that is not readily tradable on an established securities market, IRS officials write in the notice of proposed rulemaking, which appears today in the Federal Register.
A U.S. security traded on a securities exchange that is registered under Section 6 of the Securities Exchange Act of 1934 would count as a readily tradable domestic security.
A foreign security traded on a foreign national securities exchange that is officially recognized, sanctioned or supervised by a governmental authority would count as a readily tradable foreign security, officials write.